Money is available for small businesses, but it takes work

Q: I hear that there is more money available these days for Small Business Administration loans. Is that true? If it is, how do I apply to the SBA to get one?   Thanks in advance – Maurice

A: Yes, it is true that there are more SBA loan funds available right now than in years past. This is mainly due to 1) a change in administrations, and 2) the fact that both TARP and the new small business law added funding for SBA lending.

That said, the first thing to understand about SBA loans is that the SBA does not make loans, it guarantees loans. The SBA is not a direct lender. Instead, what it does is work with various financial institutions (everything from large national banks to small community credit unions) in order to get money in the hands of entrepreneurs via SBA-backed loans.

The background is this: As we all know too well, getting a small business loan today is difficult. Banks, burned by the mortgage and credit crises, have tightened their underwriting criteria, resulting in fewer loans.

Enter the SBA.

By guaranteeing repayment of at least part of the loan (up to 90% per the new law, but usually less), the federal government reduces a bank’s exposure. In turn, this allows the institution to loosen criteria a bit and make more loans to more businesses and entrepreneurs.

Why does the SBA do this? To spur business development, of course.

The government knows that the more loans that are made to qualified small businesses, the greater the positive economic rippling effect. Getting money in the hands of qualified small businesses helps business, helps the economy and helps generate more tax revenue.

You may have noticed that I keep using the phrase “qualified small businesses.” Yes, you still must qualify for an SBA loan, but happily, qualifying for a SBA loan is easier than qualifying for a traditional bank loan. That said, “easier” is not the same as “easy.”

Here are the essentials of what you need to know when looking to get an SBA loan:

• First, do not expect to get 100% financing. Not gonna happen. To get an SBA loan, you need to have some of your own money invested in the business. The SBA and its lenders expect that you will participate in the financial risk.
• Second, expect to share a lot of documentation with the lender. You will need both business and personal records: Tax returns, bank statements, profit and loss statements, leases and contracts, income and expenditures ledgers, and so on.
• Next, whereas most small business loans are collateralized (usually to the real estate of the principles), the good news is that with some SBA loans you may not need collateral. It depends on the size of the loan for one, but , according to the SBA, loans generally will not be declined “where inadequacy of collateral is the only unfavorable factor.” (Source: SBA.gov.)
• Also, the well-known 5 C’s of credit matter. When analyzing a loan application, the SBA and its lender will look especially at your character and your capacity. By character, they are referring to whether you are “sufficiently trustworthy to repay the loan.” They will also consider your references and the background and experience of your team. Capacity relates to your ability to service the loan and repay it in full and on time.
• Finally, in all likelihood, you will need to sign a personal guarantee if you want to secure an SBA loan.

It is also important to understand that not all SBA lenders are the same. While the SBA gives banks criteria to use when making loan decisions, it is also true that some banks are more lenient than others, others are more aggressive, and still others are more conservative.

It behooves you to shop around.

Today’s Tip: Remember, bankers are people and they lend to the people who make up a business. As such, get to know your banker. Put a face to your business. It will help.

Steve Strauss is an internationally recognized lawyer, columnist and speaker. He is the author of 15 books. Steve’s business column, Ask an Expert, appears weekly on USAToday.com. Copyright 2010 Steven D. Strauss. Steve Strauss can be found at www.MrAllBiz.com